Companies Act 2006 - Financial Assitance for Purchase of Own Shares

CHAPTER 2: FINANCIAL ASSISTANCE FOR PURCHASE OF OWN SHARES

986. The following sections replace Chapter 6 of Part 5 of the 1985 Act which contains a
prohibition on the giving of financial assistance (broadly defined) by a company or any of its
subsidiaries for the purpose of the acquisition of shares in itself. There are exceptions which
apply to all companies, contained in section 153 of the 1985 Act, and a relaxation of the
general rule for private companies in sections 155 to 158 of that Act.

987. As recommended by the CLR (Final Report, paragraph 10.6), the Act abolishes the
prohibition on private companies giving financial assistance for a purchase of own shares
and, as a consequence, the relaxation for private companies (sometimes referred to as the
“whitewash” procedure) is no longer required. The provisions in sections 155 to 158 have
therefore been repealed and are not carried forward in the Act.

Section 678: Assistance for acquisition of shares in public company

988. This section replaces section 151(1) and (2) of the 1985 Act and restates section
153(1) and (2) of that Act. The key change is that the prohibition on private companies
providing financial assistance for a purchase of own shares is not carried forward.

989. The general prohibition on the giving of financial assistance by a public company is
required by the Second Company Law Directive (77/91/EEC) and this prohibition is retained
in subsection (1). As under the current law, the prohibition extends to post-acquisition
assistance (see subsection (3)).

990. The prohibition on the giving of post-acquisition assistance only applies if the
company in which the shares were acquired is a public company at the time that the
assistance is given (see subsection (3)). It follows that where a company has re-registered as a
private company since the shares were acquired and is a private company at the time the postacquisition
assistance is given, the prohibition in this section will not apply. However, if at
the time the shares were acquired the company was a private company, but at the time the
post-acquisition assistance is given it has re-registered as a public company, the prohibition
will apply.

991. The provisions of section 153(1) and (2) of the 1985 Act are retained in subsections
(2) and (4) which carry forward the current exemption from the prohibition on the giving of
financial assistance: namely, that such assistance is not prohibited if the principal purpose of
the assistance is not to give it for the purpose of an acquisition of shares, or where this
assistance is incidental to some other larger purpose of the company and (in either case)
where the assistance is given in good faith in the interests of the company. As now, in these
circumstances no offence is committed by the company or its officers (see section 680). The
changes introduced by section 678 also give statutory effect to the decision in Arab Bank plc
v. Mercantile Holdings Ltd [1994] 2 All ER 74: namely, that the statutory prohibition on a
company giving financial assistance for the purpose of acquiring its own shares or shares in
its holding company does not apply to the giving of assistance by a subsidiary incorporated in
an overseas jurisdiction.

992. In the Arab Bank case, Millett J considered the geographical scope of section 151 of
the 1985 Act and concluded that this had inadvertently been altered during the consolidation
of UK companies legislation in 1985. In particular, the 1985 Act appears to go further than
the 1980 Act and, in interpreting the current provision, Millett J applied the presumption that,
in the absence of a contrary intention, section 151 could not have extra-territorial effect. The
difficulty with the 1985 Act provision arises as a result of how the prohibition is framed: in
particular, the prohibition applies “to the company or any of its subsidiaries” and
“subsidiary”, as defined in section 736 of the 1985 Act, includes foreign companies. The
prohibition in the Act is restricted to UK public companies and their UK subsidiaries as a
result of the definition of “company” in section 1. Subsection (1) of that section makes it
clear that, unless the context otherwise requires, “company” means a company which is
formed and registered under the Act or a former UK Companies Act.

Section 679: Assistance by public company for acquisition of shares in its private
holding company

993. This section replaces sections 151(1) and (2) and 153(1) and (2) of the 1985 Act.

994. Like section 678 this section does not carry forward the prohibition on private
companies providing financial assistance for a purchase of own shares, but the current
prohibition on the giving of financial assistance by a public company subsidiary for the
purpose of an acquisition of shares in its private holding company is retained. Section 679
also retains the prohibition on the giving of post-acquisition assistance by a public company
subsidiary.

CHAPTER 3: REDEEMABLE SHARES

995. Under section 159 of the 1985 Act a company that is limited by shares, or limited by
guarantee and having a share capital, may, if authorised to do so by its articles, issue shares
which may be redeemed at a future point in time at the option of the company or the
shareholder. The provisions of section 159 are carried forward in the following sections but
there are changes to the ways in which companies may issue redeemable shares and redeem
such shares (see below).

Section 684: Power of limited company to issue redeemable shares

996. This section replaces section 159(1) of the 1985 Act and restates section 159(2) of
that Act.

997. For private companies only, it removes the requirement for prior authorisation in the
company’s articles for a proposed allotment of redeemable shares. If they wish, the members
may, however, restrict or prohibit the authority given to a company by this section, by
including a provision to this effect in the company’s articles (see subsection (2)).

Section 685: Terms and manner of redemption

998. This replaces section 160(3) of the 1985 Act (which provides that the terms and
manner of redemption must be set out in the company’s articles) and existing section 159A
(also entitled “terms and manner of redemption”), which was inserted into the 1985 Act by
section 133 of the Companies Act 1989 and remains uncommenced.

999. As recommended by the CLR (Final Report, paragraph 4.5), this section enables the
directors of both private and public companies alike to determine the terms, conditions and
manner of a redemption of redeemable shares. The power conferred on the directors by this
section requires prior authorisation by the company’s members, either by resolution of the
company or through the articles (see subsection (1)). As recommended by the CLR (Final
Report, paragraph 7.30) the terms and conditions of redemption will have to be stated in the
statement of capital required to be filed under section 555. If the directors are not authorised
to set the terms of the redemption, then they must be set out in the company’s articles (see
subsection (4)).

1000. Where the directors exercise this power they must do so before the shares in question
are allotted (see subsection (3)).

Section 686: Payment for redeemable shares

1001. This section replaces section 159(3) of the 1985 Act (which requires that where a
company issues redeemable shares, the terms of redemption must provide for payment on
redemption). It removes the current requirement, in section 159(3), that the terms of
redemption must provide for payment on redemption. This means that the terms of
redemption may provide for the company and the holder of the shares to agree that payment
may be made on a date later than the redemption date.

Section 688: Redeemed shares treated as cancelled

1002. This section restates section 160(4) of the 1985 Act but with the exception of the
reference to the impact of the redemption on the authorised share capital of the company –
the concept of which is not replicated under the Act.

Section 689: Notice to registrar of redemption

1003. This section restates section 122(1)(e) and 122(2) of the 1985 Act and Schedule 24 to
that Act but there is a new requirement for a statement of capital where a company gives
notice to the registrar of a redemption of redeemable shares (see subsections (2) and (3) and
the note on section 619).